Fast Close: A Guide to Closing the Books Quickly

by Steven M. Bragg

Overview

Praise for Fast Close: A Guide to Closing the Books Quickly

"Steve captures the essence of the problems affecting the financial close process within corporations of all sizes; from the period close of subledgers and general ledger through financial reporting, and the relationship and interdependencies of governance, people and technology. A must-read for the corporate controller."
—David Taylor, ACMA, MBA, VP Strategy, Trintech Inc.

"Fast Close: A Guide to Closing the Books Quickly, Second Edition is a must-read for today's busy controllers. Steven Bragg points out everything that can be done outside the close that you just never realized didn't actually have to be part of the month-end close process! Very commonsensical approach!"
—Kathleen Schneibel, mba, cpa, Controller/CFO for Hire, KMAS Consulting LLC

"A well-executed 'fast close' can bring many valuable benefits to any company, from improving organizational performance to transforming accounting executives from financial historians to trusted advisors. In Fast Close, Second Edition, Steve systematically breaks down the steps required to achieve a fast close in both public and private companies, providing financial executives with tips, checklists, and a cost-effective road map to implement fast close procedures in virtually any company."
—Matthew Posta, Esq., CPA, Vice President of Finance, Key Air, LLC

FROM THE FIRST EDITION

"This is an outstanding book in which Steve reveals his secrets to a fast close. Having personally experienced his (one-day) fast close for years and enjoyed the beneficial impact on my company, I highly recommend this book for all financial officers who desire to have a large, favorable impact on their company."
—Richard V. Souders, President and CEO, Kaba Workforce Solutions

Product Details

ISBN-13:	9780470480762
Publisher:	Wiley
Publication date:	03/16/2009
Sold by:	JOHN WILEY & SONS
Format:	eBook
Pages:	224
File size:	3 MB

About the Author

STEVEN M. BRAGG, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst&Young and auditor at Deloitte&Touche. He received a master's degree in finance from Bentley College, an MBA from Babson College, and a bachelor's degree in economics from the University of Maine. He has been the two-time president of the Colorado Mountain Club, is an avid alpine skier and mountain biker, and is a certified master diver. Mr. Bragg resides in Centennial, Colorado. He is also the author of Accounting Best Practices and Accounting Policies and Procedures Manual, both published by Wiley.

Read an Excerpt

Fast Close

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By Steven M. Bragg

John Wiley & Sons

ISBN: 0-471-70897-6

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Chapter One

Introduction

Achieving a fast close is a process improvement project that requires the full attention of the accounting staff for a long period of time. Before committing to such a project, one should be clear about what type of financial close works best for a company's specific needs, what kinds of benefits will result, and the general steps required to complete the close. This chapter provides answers to these questions.

DIFFERENT TYPES OF FAST CLOSE

Several variations on the fast close concept have appeared, causing some confusion about the nature of each one. The fast close is simply an acceleration of the standard closing process, resulting in approximately the same financial reporting package being issued (possibly somewhat stripped down). The focus of this approach is a careful examination of the closing process to strip out wait times, consolidate tasks, eliminate unnecessary functions, add transaction best practices, and selectively apply automation where necessary. It is a task in which an industrial engineer trained in efficiency improvements would feel quite at home.

The soft close is less labor intensive than a regular close, because it does not generate as much information. It is designed solely for internal corporate use, so its end product is only those management reports needed to run operations. With this reduced reporting goal in mind, theaccounting staff can eliminate the use of overhead allocations. It may also be possible to stop some accruals and ignore the elimination of intercompany transactions, depending on the level of reporting detail desired. The soft close is most commonly seen in companies that only issue quarterly or annual reports to outside entities, leaving all other months available for the soft close.

The virtual close involves the use of a largely automated accounting system, one that can produce required financial information at any time, on demand. This approach is rarely used and only in the largest companies that can afford to install an enterprise resources planning (ERP) system that automatically consolidates and reports financial information. Also, the underlying transactions that feed into the ERP system must be essentially error free, so an accurate virtual close is really the result of a hefty software investment as well as years of continual process improvements. The financial reports resulting from a virtual close tend to be stripped-down versions of reports compliant with generally accepted accounting principles (GAAP), because this approach avoids the need for such manual tasks as overhead allocation, accrual transactions, and the establishment of various reserves.

If achieved, a virtual close can be useful in fast-moving industries where financial results must be monitored frequently in order to make rapid-fire changes to a company's tactical or strategic direction, or at least to identify problem areas for fast management attention.

BENEFITS OF THE FAST CLOSE

There are numerous benefits to achieving a fast close, which vary based on the perspective of the recipient-company management, outside investors, auditors, and the accounting department. These benefits are:

Quicker access to financial information. Company management generally feels that the primary benefit of the fast close is having access to financial information more quickly, allowing it to take rapid steps to improve a company's strategic and tactical position in the marketplace.

Marketing tool. A company's marketing staff can use the rapid issuance of financial information to trumpet the company's openness to the investing public. This does not necessarily mean that the company will issue sterling financial results, only that it will issue results faster. Still, it implies some level of expertise on the part of the accounting department in processing transactions and compiling them into reports, and so may impart some level of comfort to investors in that regard.

More time for financial analysis. Closing the books fast does not necessarily mean that one must issue financial statements sooner. An alternative is to spend additional time analyzing the preliminary financial statements in order to issue more complete footnotes alongside the financials at a later date.

Improved processes. Because the fast close improvement process requires careful attention to process enhancement, there will inevitably be side-benefit improvements to many accounting processes, leading to heightened efficiency and fewer errors. Within the accounting department, this may be seen as the top benefit of the fast close.

Improved control systems. Internal and external auditors appreciate the enhanced attention to control systems needed to ensure that information is compiled properly and fast.

More time, period. Although some aspects of the fast close simply push activities into the period either before or after the core closing period, some actions are completely eliminated or at least reduced in size. This results in less total time required for the closing process, which can be used by the accounting staff for a variety of other activities.

Consequently, the wide array of fast close benefits results in multiple supporting constituencies-management, investors, auditors, and the accounting department.

LEGAL ISSUES IMPACTING THE FAST CLOSE

The Sarbanes-Oxley Act has made it more difficult to achieve a fast close. The problem is Section 302 of the Act, which requires formal management certification of the accuracy of the financial statements. Specifically, Section 302 requires that the financial statements of publicly held companies do not contain any material untrue statements or material omissions or be considered misleading. Understandably, those signing this certification want to spend more time ensuring that the financial statements are indeed correct. Some recent surveys of the time needed to produce financial statements have indicated a slight increase in the time required since the passage of Sarbanes-Oxley, probably because of Section 302.

However, Section 409 of Sarbanes-Oxley requires that public companies disclose to the public on Form 8K any information on material changes in their financial condition or operations. This must happen within four days of the occurrence of a triggering event. This requirement calls for financial and operating systems that bring issues to the attention of management faster than might previously have been the case.

Finally, the Securities and Exchange Commission (SEC) has accelerated its requirement for the timely filing of quarterly and annual reports by publicly held companies. The rule change calls for a three-year decline in the reporting period to 60 days for annual reports and to 35 days for quarterly reports (down from 90 days and 45 days, respectively). This rule applies to domestic companies that have a public float of at least $75 million and that have previously filed at least one annual report.

In short, corporate controllers and chief financial officers are caught between a rock and a hard place-they must file financial and operating information sooner but want to retain it in-house longer to ensure that it is correct. The solution is still the fast close-information is available quicker for filing requirements, while company management can still retain it for further review until the accelerated filing dates come due.

STEPS TO ACHIEVE A FAST CLOSE

Several steps are required to achieve a fast close, which are addressed in detail in the following chapters. They are listed in the following recommended order of implementation:

1. Review the closing process (Chapter 3). The first step in achieving a fast close is to examine the current state of the closing process and determine the time required to complete each functional area (i.e., inventory, billing, payroll, payables, and cash processing, as well as final closing activities). It is useful to summarize the results of this investigation into a time line that can be used to spot which segments of the closing process are particularly in need of improvement.

2. Alter the timing of closing activities (Chapter 4). A set of changes that are easy to implement and yet have a startling positive impact on the duration of the close is to shift many of the closing activities either into the preceding month or into the period immediately following the issuance of financial statements.

3. Revise the contents of the financial statements (Chapter 5). The close will take less time if there is less information to report. There are several variations on this concept, such as eliminating custom reports entirely, shifting to electronic modes of report delivery, and reporting some operating or metric information separately from the financial statements.

4. Optimize the use of journal entries and chart of accounts (Chapter 6). Journal entries require excessive amounts of time, may be entered incorrectly, and do not always contribute to the accuracy of the financial statements. Thus, standardizing journal entries, eliminating inconsequential ones, and automating them can be of considerable assistance. Also, using a common chart of accounts or at least creating mapping tables will reduce the labor associated with consolidating results reported by subsidiaries.

5. Standardization and centralization (Chapter 7). If a company has multiple locations, the closing process will be nearly impossible to improve unless the controller pays considerable attention to the standardization of accounting transactions, so they are completed in exactly the same way in all locations. Even greater closing improvements can be attained by centralizing accounting functions for the entire company in a single location.

6. Closing the inventory function (Chapter 8). The topic of inventory makes many controllers shudder, because a combination of poor controls and large investments in this area make the cost of goods sold an extremely difficult area to calculate, leading to massive time requirements during the closing process. This problem can be reduced by implementing tight inventory tracking and cycle counting systems, as well as by adopting better materials management policies to reduce the overall level of inventory investment.

7. Closing the billing function (Chapter 9). Generating month-end invoices may be the bottleneck operation during the month-end close. This problem can be reduced by shifting recurring invoices and the rebilling of expenses out of the closing period, electronically linking the shipping database to the accounting department, and ensuring fast completion of billable hours reporting.

8. Closing the payroll function (Chapter 10). The payroll function principally interferes with the closing process because employees are late in recording their billable hours, which can be resolved through the use of automated time clocks and Web-based time recording systems. There are also several ways to streamline the commission calculation process so it takes much less time during the core closing period.

9. Closing the payables function (Chapter 11). Waiting for late supplier invoices to arrive, as well as pushing those invoices through a Byzantine approval process can seriously interfere with the month-end close. There are several approaches for streamlining the basic approval process, while the intelligent use of expense accruals, coupled with the purchase order database, can eliminate the wait for late invoices.

10. Closing the cash processing function (Chapter 12). Some controllers like to wait until the bank statement arrives in the mail before issuing financial statements, so they can first conduct a bank reconciliation. The postal float on the bank statement can be two or three days, which directly delays the issuance of financial statements. This can be avoided through the use of online bank reconciliations, while several techniques are available for improving the speed of processing incoming checks.

11. Incorporate automation into the closing process (Chapter 13). There are several ways to use automation to improve the closing process, ranging from a series of small efficiency-related improvements to workflow management software, a data warehouse, consolidation software, and an ERP system.

12. Ongoing improvements in the closing process (Chapter 14). Although the preceding action items may have achieved a considerable improvement in the speed of the close, there is always room for improvement. Consequently, constant attention to the process flow and measurement of key metrics will ensure that the fast close remains fast.

The order in which improvements are listed here (and throughout the book) is intended to focus attention on low-cost, easy-to-implement changes that have a major and immediate impact on the speed of the close. Despite requiring considerable long-term effort, inventory-related changes are listed relatively high in the priority list, because the accounting staff needs to begin work on them as soon as possible in order to achieve any benefits within a reasonable time frame. Automation improvements are listed near the bottom of the priorities, because they are generally very expensive, require considerable time to implement, and do not have a major impact on the duration of the closing process.

SUMMARY

Although the soft close and virtual close are available as alternatives to the fast close, most companies need to issue full-scale financial statements every month, which precludes the soft close. The virtual close requires considerable resources to achieve, and so is also not an option in most cases. Consequently, the focus throughout the remainder of this book is on the standard fast close, which presents considerable benefits to the implementing company.

The next chapter outlines the primary traditional closing steps required for a small single-location company, and then goes on to cover additional closing requirements for companies having multiple locations, international locations, and public reporting requirements. This information serves as a basis for the closing enhancement activities that begin to be addressed in Chapter 3.

(Continues...)

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Table of Contents

Preface.

Chapter 1 Introduction.

Different Types of Fast Close.

Benefi ts of the Fast Close.

Legal Issues Impacting the Fast Close.

Steps to Achieve a Fast Close.

Summary.

Chapter 2 Your Current Closing Process.

Traditional Closing Process: Basic.

Additional Closing Tasks for the Multidivision Company.

Additional Closing Tasks for the Multinational Company.

Additional Closing Tasks for the Public Corporation.

Problems with the Closing Process.

Summary.

Endnote.

Chapter 3 Conducting a Review of the Closing Process.

Steps in the Process Review.

Payables Process Review.

Billing Process Review.

Inventory Process Review.

Cash Process Review.

Final Closing Process Review.

Total Duration of the Closing Process.

Summary.

Endnote.

Chapter 4 Alter the Timing of Closing Activities.

Altering the Closing Mindset.

Review and Correct Subledger Transactions Throughout the Month.

Complete the Bank Reconciliation Every Day.

Review Uncashed Checks.

Update the Inventory Obsolescence Reserve.

Determine the Lower of Cost or Market.

Calculate Overhead Allocation Bases.

Bill Recurring Invoices.

Conduct a Preliminary Comparison of the Shipping Log to Invoices Issued.

Review Preliminary Rebillable Expenses.

Update the Bad Debt Reserve.

Review Preliminary Billable Hours.

Accrue Interest Expense.

Determine Pension Plan Funding.

Determine Flexible Spending Account Funding.

Accrue Unpaid Wages.

Accrue Unused Vacation Time.

Accrue Travel Expenses.

Reconcile Asset and Liability Accounts.

Calculate Depreciation.

Compile Preliminary Commissions.

Review Financial Statements for Errors.

Complete Selected Financial Reports in Advance.

Deferred Closing Activities.

Summary.

Chapter 5 Revise the Contents of the Financial Statements.

Alter the Mode of Report Delivery.

Standardize Reports.

Eliminate Cost Reporting from the Reporting Package.

Separate Metrics from the Financial Reporting Package.

Summary.

Chapter 6 Optimize the Use of Journal Entries and Chart of Accounts.

Eliminate Immaterial Journal Entries.

Standardize Journal Entries.

Convert to Recurring Journal Entries.

Centralize Use of Journal Entries.

Use Journal Entries to Accrue Expenses Delaying the Close.

Automate Journal Entry Postings.

Use Accruals Only for External Reporting.

Defi ne Accounts.

Standardize the Chart of Accounts.

Automate Eliminations of Intercompany Transactions.

Summary.

Chapter 7 Standardization and Centralization.

Impact of Standardization on the Closing Process.

Impact of Centralization on a Multilocation Accounting Department.

Impact of Centralization on a Single-Location Accounting Department.

Incorporating Standardization and Centralization into Acquisition Activities.

Summary.

Chapter 8 Closing the Inventory Function.

Create an Inventory Tracking System.

Implement Cycle Counting.

Reduce the Amount of Inventory.

Properly Record the Lower of Cost or Market Rule.

Reviewing Obsolete Inventory.

Preventing Obsolete Inventory.

Summary.

Endnotes.

Chapter 9 Closing the Billing Function.

Bill Recurring Invoices in the Preceding Month.

Computerize the Shipping Log.

Eliminate Rebillable Expense Processing from the Core Closing Period.

Eliminate Month-End Statements.

Print Invoices Every Day.

Transmit Transactions via Electronic Data Interchange.

Summary.

Endnote.

Chapter 10 Closing the Payroll Function.

Automatically Calculate Commissions in the Computer System.

Simplify the Commission Structure.

Install Incentive Compensation Management Software.

Post Commission Payments on the Company Intranet.

Avoid Adjusting Preliminary Commission Accrual Calculations.

Use a Bar-Coded Time Clock.

Use a Web-Based Timekeeping System.

Automate Vacation Accruals.

Merge Sick Time into Vacation Time.

Cap the Amount of Vacation Time to Be Carried Forward.

Summary.

Endnote.

Chapter 11 Closing the Payables Function.

Automate the Month-End Cutoff.

Pay Based on Receiving Approval Only.

Automate Three-Way Matching.

Reduce Required Approvals.

Use Negative Assurance for Invoice Approvals.

Use Procurement Cards.

Have Suppliers Include Their Supplier Numbers on Invoices.

Receive Billings Through Electronic Data Interchange.

Request That Suppliers Enter Invoices Through a Web Site.

Audit Expense Reports.

Automate Expense Reporting.

Link Corporate Travel Policies to an Automated Expense Reporting System.

Issue a Standard Account Code List.

Link Supplier Requests to the Accounts Payable Database.

Automate Payments for Repetitive Processing.

Eliminate Manual Checks.

Use a Signature Stamp.

Ignore Supplier Invoices and Pay from Statements.

Issue Standard Adjustment Letters to Suppliers.

Summary.

Endnote.

Chapter 12 Closing the Cash Processing Function.

Access Bank Account Information on the Internet.

Avoid Delays in Check Posting.

Collect Receivables Through Lockboxes.

Install a Lockbox Truncation System.

Access Online Check Images from a Lockbox.

Consolidate Bank Accounts.

Summary.

Endnote.

Chapter 13 Impact of Automation on the Closing Process.

Principles of Fast Close Automation.

Implement Minor Programming Changes on an Ongoing Basis.

Automate General Ledger Interfaces.

Install a Web-Based Timekeeping System.

Install a Workfl ow Management System.

Install Consolidation Software.

Install a data Warehouse.

Install an Enterprise Resources Planning System.

Summary.

Chapter 14 Closing the Books of a Public Company.

Overview.

Constructing the SEC Filing.

Quarterly Auditor Reviews and Audits.

Quarterly Legal Review.

Offi cer Certifi cation.

Audit Committee Approval.

EDGARizing.

Summary.

Chapter 15 Controls for Financial Reporting.

Overview.

Controls for Financial Reporting.

Summary.

Chapter 16 Ongoing Improvements in the Closing Process.

Ongoing Improvement Process.

Improvement Measurements.

Summary.

Appendix A Comprehensive Closing Checklist.

Appendix B Fast Close Policies and Procedures.

Appendix C Soft Close Checklist.

Appendix D Year-End Close Checklist.

Index.